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Credit Suisse: Singapore Banks Stand Out, Especially DBS
Aspire, Hot Picks | 13 January 2015
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By: Lim Si Jie
Articles (169) Profile

With uncertainty clouding the outlook of 2015, Singapore is likely to stand out amongst the other countries in the region and provide a “safe haven for investors”.

In 2015, Credit Suisse (CS) believes that the Singapore banking sector is likely to “stand out” amongst the other sectors in Singapore. Over the past year, expectations of 2015 Singapore earnings have been falling. Most sectors in Singapore saw earnings cut with the exception of the banking sector, which saw a slight earnings upgrade towards the end of 2014.

Source: IBES; Consensus EPS - FY2015

Large Contribution To SG EPS Growth
Consensus estimates that Year-on-Year growth forecast for MSCI Singapore will hit seven percent. Out of this seven percent, CS expects the banking sector to contribute 2.4 percent towards MSCI Singapore growth forecast. This growth will improve to 5.2 percent in FY16.

The macro environment continues to be a key concern for the banking sector. A steeper macro slowdown triggers a series of reaction from the government, while earlier-than-expected rate hikes might result in spite in credit costs.

Diminishing Loan Growth
While loan growth in ASEAN markets (for UOB and OCBC) should continue to be steady, tighter liquidity conditions and asset quality worries pose some restrictions. “China driven offshore loan growth has been a big driver in Singapore and Hong Kong in the past few years”, writes CS.

However, it has been weakening over the past few quarters and is likely to carry some downside risks to 2015E. Banks will still be expecting to hit high single digit loan growth in 2015 despite sustained weakness in the property market and overall macro growth environment.

Correlation Between Short Term Rates And NIMs
Historically, higher short-term rates have consistently benefitted Singapore bank Net Interest Margins (NIMs) and should continue to do so. DBS seems rather confident that higher short term rates might help Net Interest Margins (NIMs) in 2H15.

CS notes that this confidence stems from the fact that “DBS is likely to gain the biggest earnings/ROE boost from higher NIMs”. OCBC and UOB remain cautious on the impact of higher short term interest rates on NIM.

Source: Datastream, MSCI; MSCI SG earnings forecast breakup

Earnings guidance from banks’ management remains relatively muted as the risks clearly point towards the downside. However, CS believes that stable operating and credit costs should help banks deliver modest EPS growth in FY15E.

Credit Suisse Top Banking Pick: DBS
CS picked DBS as its top pick in the sector base on a bottom up approach. DBS has the “most potential to generate positive earnings surprise” amongst the three banks in 2015, driven by “better NIMs and loan growth”. Although volatile capital markets remains a key risk for DBS, its non-interest income is now much more broad-based and resilient.

Expectations of higher short-term rates could create a huge fluctuation in share price. CS has an Overweight rating on DBS with a target price of $23.

Of the other banks, UOB and OCBC, CS remains Neutral on both on them with target prices of $25.50 and $11 respectively.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

United Overseas Bank  26.250 -0.09 -0.34%   
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Oversea-Chinese Banking Corp  11.030 -0.05 -0.45%   
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Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

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